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Opinion: Bernard Hickey argues both potential governments should say how they'd deal with the 1 in 5 chance of global recession and budget blowout
By Bernard Hickey
Just imagine if the worst happened and Dan Carter was forced out of the World Cup.
Graham Henry did just that and prepared three backup first fives. In the end, the All Blacks had to use their fourth back-up first five through most of the final. Stephen Donald played well, in part because he had played in pressure matches before and knew the calls after a couple of weeks in the squad. Henry and Richie McCaw both cited their contingency planning in the post-victory celebrations.
So where is our Stephen Donald for the economy?
Just imagine if the worst happened for the economy. What would our elected government do to deal with it? What is their plan for the worst case scenario?
The scale of that worst case scenario has now been spelt out in black and white in Treasury's Pre-Election Fiscal and Economic Update (PREFU). Treasury was very particular about highlighting the downside risk of a much deeper downturn in the global economy in its PREFU.
It took the trouble to forecast what would happen to the budget deficit track if the American and the European economies contracted 1.5-2% over the next year and Chinese economic growth slowed to 6% from 10%.
This would sharply reduce commodity prices and widen New Zealand's current account deficit to 7.9% of GDP by March 2016 from the 6.9% forecast in the main scenario. Nominal GDP would be a cumulative NZ$35 billion lower through the year to June 2016, meaning tax revenue would be a cumulative NZ$4.5 billion lower.
The budget would therefore remain in deficit right through until 2015/16, where it will still be in deficit to the tune of 0.5% of GDP. The main scenario is for the budget returning to surplus by 2014/15, little changed from Treasury's May forecast, even though the composition and track for the deficit is a little different. See Alex Tarrant's article here.
Net government debt would rise to 35% of GDP from 20% now and about 7% higher than the central track. Treasury said this scenario had a one in five chance of happening.
Finance Minister Bill English said National was committed to its target of getting into surplus by 2014/15 by controlling growth in government spending. However, he gave himself some wiggle room by saying the surplus was a target to be achieved, but "not all costs."
English also pointed out that the double downgrade on September 30 had yet to increase either government borrowing costs or the borrowing costs of households or businesses. He suggested that a significant downturn globally may see interest rates stay low or even go lower, which would reduce the fiscal and household pain of high debt.
He said there was a one in 20 or one in 30 chance of the type of financial market meltdown seen in the wake of the uncontrolled collapse of Lehman Brothers.
I asked English if both major parties should outline to the electorate what they would do in the event of a significant downturn (see video below).
He said the government was in a better position to handle such a downturn than it had been in 2008. The government would continue to protect the vulnerable while minimising the amount of extra borrowing.
But he stopped short of saying what response the government would take. He also said he didn't expect other parties to spell out their worst case policies.
Why we should know
The best way for the electorate to look at this issue of whether parties should detail their 'worst case' scenarios is to look at Treasury's PREFU from before the 2008 election.
These forecasts were finalised on August 28, 2008 and the PREFU was published on October 6, 2008.
Just think back to what was happening at the time. Lehman Brothers filed for bankruptcy on September 15, 2008, in between the finalisation of the PREFU and its publication. Global trade slumped more than 30% in the ensuing 6 months. America slumped into a savage recession that many argue hasn't really ended. New Zealand's recession was extended until early 2010.
Back then Treasury was forecasting a deficit this year of NZ$2.4 billion. Instead we ended up with a deficit of NZ$18.4 billion, albeit including NZ$9.1 billion due to the Christchurch earthquakes.
Even Treasury says there are significant risks of a financial meltdown in Europe forcing both Europe and America back into recession. It also admits China may not be able to play the same supportive role it did in 2009 because of high inflation and growing bad debts.
As I write, European leaders are in crisis talks to try to prevent the meltdown of the European financial system. There is no guarantee they can avoid it, although Bill English seemed confident they could get through, albeit with a few hiccups, and that it would take a long time.
Back in the 2008 election campaign both major parties went through as if in a daze. Neither presented potential policies to deal with a protracted economic downturn or a financial meltdown. Both crossed their fingers, put on their best makeup and smiled and waved through to polling day.
So instead, we had policy made on the run during and after the election campaign. Labour was forced into a retail and wholesale deposit guarantee in the first week of the campaign that ultimately led to the bailouts of South Canterbury Finance and Equitable Mortgages.
Once elected, National suspended contributions to the NZ Superannuation Fund and introduced the big tax switch, including an unpromised GST increase and bigger income tax cuts. It also chose to borrow heavily rather than cut into middle class entitlements such as Working For Families and Interest Free Student Loans, although it did cut back on KiwiSaver subsidies.
None of these policies were previewed before the election.
The reason for PREFU
The whole point of the PREFU's introduction as part of the 1989 Public Finance Act was to ensure there were no surprises for the electorate after an election.
No new government should be able to say: 'We looked under the hood and found everything was different. Sorry, we'll have to reneg on our promises.'
Treasury went out of its way to include a four page section in the PREFU (pages 49-52) detailing the downside scenario.
Our major political parties should not ignore it.
Voters can't allow them to ignore it again.
Graham Henry didn't cross his fingers and hope that Dan Carter's abductor longus tendon would be OK. He prepared Colin Slade, Stephen Donald and Aaron Cruden for pressure games. All three had started against top tier opposition in pressure matches.
Have our potential governments prepared policies that would allow them to respond to the worst and ensure voters aren't surprised?
Voters must demand Labour and National detail what their 'Stephen Donald' policies are.
See Finance Minister Bill English answer below. Watch Labour Party finance spokesman David Cunliffe's response here.
(Updates with video of English, link to Cunliffe's response)